‘What would you like for Father’s Day daddy” my seven-year-old asked. ‘We are tired of getting you the same boring old gifts.’
‘It is very kind of you to ask but honestly there isn’t anything that I can think of offhand’ I replied.
‘How about we set up a family trust for you to assist with asset protection, estate planning and to potentially minimise tax outlays’ piped in my three-year-old, demonstrating a vocabulary and a knowledge of the workings of discretionary trusts much beyond her years.
‘Great idea’ chipped in the seven-year-old. ‘with the assistance of an accountant with expertise in this field, we can take advantage of tax arbitrage to ……..’
Okay, so this conversation didn’t really happen. But if it had, my reply to my children would have been ‘Yes please. That is a great idea and certainly surpasses the sock offerings of previous years.’
Please allow me to explain why.
A family trust is a discretionary trust that is set up to hold on trust, a family’s assets or to conduct a family business.
Discretionary trusts are established by the person who sets up the trust known as the trustee. The trustee can then exercise their discretion to choose the amount of monies that will be distributed to each beneficiary under the trust.
As a solicitor, I am not permitted to give tax advice. However it is widely known (even if not by my daughters) that a key benefit of having a family trust is that the trustee, who will usually be either the Mum or Dad of the family, can decides to distribute to the beneficiaries in a manner to minimise the tax payable on monies earned as a whole.
The beneficiaries of the income are ordinarily the taxpayer trustee and spouse, the company, their children, or remoter family. Tax savings are achieved when greater income goes to family members on low incomes who benefit from the marginal tax scales. Capital can also be distributed in a similar way to the same effect.
As well as potential tax benefits, people also set up discretionary trusts for asset protection and estate planning purposes. The latter enables the transfer of assets without immediate tax consequences.
While recent changes to the taxation of family trusts by the ATO has impacted on some of their effectiveness for tax planning purposes (the 2011 removal of the low-income offset threshold for minors having a significant effect), they still remain a useful tool.
Whether a family trust will be of benefit to you will depend on upon your family group, income and capital. Your accountant should be well placed to provide advice on this. Your lawyer will be happy to point you in the direction of an accountant who can advise should you require it.
And as for Father’s day, had the conversation taken place, it would likely have ended like this:
‘Alternatively, we could look at a short-term investment in the derivatives market’ suggested the three-year-old.
‘Perhaps some gilt-edged securities or stocks’ offered the seven-year-old.
‘Perfect’ replied my youngest treasure, ‘Stocks. No wait. I have a better idea. Socks! He wears socks’
I already know before Sunday that I will be waking up to new socks.
Enjoy Father’s Day.